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I recently visited the University where I studied and gained my Law and Commerce degrees. I wanted to use the internet so I visited the library, sat down at a computer, and tried to login; testing to see if my username and password were still accepted by the system. Low and behold it worked!

Not only was I able to use the internet, my favourite bookmarks from almost a decade ago were still available. More of a suprise came in what was still contained on the server: all of my documents from my last year of study.

I opened a document that was an essay answer to one of my final exams. It was for a paper called simply “Law and Society”, which I always thought was a strange name because the paper dealt with the history of the rise of the corporation and its effects on society. I thought that “Corporation” or “Capitalism” should have appeared somewhere in the title because when I signed up for it I had no idea that the topic would be so focussed on that subject.

In the end it was probably my favourite paper during my time at uni, and one of the most useful in informing my world view. You see most people take the current social structure, where corporations weild so much power, governments give in to almost every corporate whim and most of the populace feel powerless to effect meaningful change in their society, as a given. But the corporation in its current form is really only a new development; less than 150 years old in fact.

Its proliferation and success at achieving its aims for the private investors that its structure services, has had an effect on global society akin to the introduction of a foreign species into a virgin ecosystem. It has thrived to the detriment of all the natural resources that sustained it.

I reproduce the essay answer here for your information. It summarises an important history particularly in the wake of the Global Financial Crisis, and the Occupy Wall Street movement. I also have two other essay answers to the same exam that I will post in the near future because they contain information that I believe everybody should know. I also provide them as background to a future blog on the Occupy Wall Street movement.

Is the large publicly traded modern business corporation better characterized as public or private?

History

Originally corporations had to be set up by parliament and were limited to carrying out public services. Incorporated joint stock companies allowed private citizens to pool their money to get shares in the joint undivided stock, but a large portion of the profits always belonged to the crown.

This corporate form was most successful during the colonisation period of the 16th-17th centuries when in England the Crown would grant national charters allowing merchants to trade in particular parts of the world. The important aspect of the joint stock company is that it was primarily set up to collect revenue for the crown.

The public purpose of a company was an important aspect from the very beginning. When the parliament incorporated a charter it was always done to achieve some public purpose. Even if the granting of monopolies got out of hand the state maintained the ultimate control over the company.

The thin end of the wedge came when private actors who wished to enjoy some of the features of the corporate form began to take some of its attractive characteristics and put them to use outside of government control and without serving a public purpose. This was the advent of the unincorporated joint stock company.

The main feature which unincorporated joint stock companies sought to approximate was the ability for a number of individuals to pool their money in order to reach greater economic goals than they could separately. Although they appeared similar, in law they were treated merely as partnerships and the owners were still subject to personal liability.

Once the limited liability corporation was really given the go-ahead during the US railroad boom, the corporation really started to take on a life of its own. Limited liability gave the owners of the company a high degree of protection from prosecution in their personal capacity, and publicly traded stock did away with the idea of partnership.

The most significant departure from the corporation’s traditional role in this period was the loss of the public aspect to its constitution and therefore loss of democratic control. Previously under the British system the government had full control over a company’s behaviour, whether it was in its commercial interests or not. Now though the corporation was free to develop on its own.

The Private aspects of the Modern corporation

The starting point for looking at the characterization of the corporation as a private entity is its ownership and control. Because the modern corporation is not owned by the state, or controlled by the state the argument runs that it must therefore be a private entity.

Bowman however believes that although the ownership of a corporation is in the hands of private actors, it is diffused over so many people, and controlled by an oligarchy of managers who are not necessarily driven by personal gains via profit, that the corporation takes on its own political character.

Therefore the question now arises; if it is a body of political power, where does this place it in the public / private distinction?

Traditionally the first argument to be presented that the corporation is public is due to its public effect. Because large corporations are so big and have such a large number of stakeholders a large public effect is inevitable.

Often entire communities are based around the operations of a single company who play a very state like role in many instances. The film “Roger and Me” follows the effects on the community of Flint Michigan which was completely centred around a General Motors manufacturing plant as GM decided to close up shop and leave. Because most of the town worked at the plant when the company left it turned the town into (supposedly) America’s worst place to live. Its public effect was obvious, the unemployment it caused meant people couldn’t afford to pay their rates, property prices plummeted, and the city council suffered a massive loss of revenue because it could no longer claim tax from the company; it destroyed the towns economy.

The leaving of a community does frame a companies public effect quite well, but even in cases where corporations continue to prop up entire communities, they wield so much political power that they can appear to be integrated with local bodies of government.

Another common argument is that corporations exist to provide services for society, and as such they are a public body. Consider the case of a town where its groceries are sold through only one store, a supermarket. When the supermarket set up there had been a number of grocers, but it put them all out of business. One day however the super market chain folds and the supermarket closes leaving the inhabitants of the town without a food supply. Often in such cases the government will have to step in to ensure the supply of goods to the people, therefore fulfilling the public role that the supermarket had filled.

Corporations also conduct state functions. Increasingly corporations are taking over functions traditionally carried out by the state. Either through privatisation or contracting services out. The usual argument given in support of these actions is that corporations are more efficient at carrying out these roles.

The question therefore becomes; what exactly are corporations more efficient at doing? The answer is of course making a profit. In the case of State Owned Enterprises (SOEs) this can work to the advantage of the government when such SOEs do in fact return a profit, but the scope for the benefit of the consumer/ society as a whole narrows.

A capitalistic corporation only seeks to turn a profit by squeezing the resource for as much as they can get. This may in turn afford the state good revenue to put into other areas but at the cost of a cheap efficient service vital to the needs of the public. An Example of this in New Zealand might be the railroads which were sold to private investors in 1996. Each owner would speculate about how much the service and the land which was attached would increase in value and sell it on without maintaining or improving the safety or the service. Eventually the Government had to step in and buy it back because it was too valuable to the public to allow it to continue to erode.

This pattern of governments is becoming more and more common as more and more state assets are sold off. Corporations care little for the public roles they are filling but only the pursuit of profit. When they fail at either providing the service or turning a profit the government is required to step in to clean up the situation or bail them out. In such instances it can leave little doubt that corporations should be characterised as public.

Traditionally big business has been held to belong in two separate compartments. This goes back to the classical liberal stance that the state should not interfere with private property, but as the corporation has developed faster than the State has been able to cope with, it has as we have seen, adopted many of the states functions. Here a tension arises between the private nature of a corporation’s ownership and the public nature of its function.

In “Global Reach” Barnett and Muller illustrate the dichotomy of how the corporation has managed to out-adapt the state in terms of control, political power and acquisition of resources. Corporations have become so efficient in the central planning of their operations that they have gained sufficient political power to gain a strong influence over the state.

At this point it begins to appear that the public/ private distinction cannot be maintained. The State and Corporation have developed so closely and have become so intertwined that their separation may no longer be possible.

The classical liberal maxims got so caught up in what they were trying to achieve that it now appears to be an unsolvable case of wanting their cake and to eat it too. It was fine to keep the state from entering their private commercial affairs, but they didn’t see a problem with trying to influence the state to meet their own ends, or to take on public functions in a profit seeking exercise.